If you included for richer or for poorer in your wedding vows, it makes sense that you and your spouse might file a joint chapter 13 bankruptcy case together. Chapter 13 bankruptcy is the second most popular form of consumer debt relief, falling behind chapter 7 bankruptcy. Chapter 7 is known for its power to clear vast amounts of unsecured debts. While this is helpful if you are struggling with credit cards and medical bills, it won’t help you catch up on secured debt payments or pay off priority debts. Chapter 13 allows an individual or married couple to do just that with a payment plan tailored to their financial situation. But it ties up income and assets for either 3 or 5 years, making it complicated to proceed with other major life changes. Getting divorced is just the type of change that becomes highly burdensome when the couple is in an active chapter 13 bankruptcy case. Read on to learn more about this issue and what options may be available. To schedule your free consultation with an experienced Phoenix and Tucson bankruptcy lawyer, contact Atlas Bankruptcy Lawyers today at 602-649-4949.
The Chapter 13 Bankruptcy Process
If you are new to chapter 13 bankruptcy, it’s important to understand how the process works to determine which course of action works best for your situation. How far a married couple is into a chapter 13 payment plan can affect which option is the most strategic under their circumstances. Chapter 13 bankruptcy payment plans pay off debts in a certain order. First are bankruptcy costs, followed by secured debts, then priority debts. Unsecured debts are the final category of debts that chapter 13 bankruptcy addresses. This category only has to be paid if the debtor still has income remaining at the end of their payment plan. Payments are based on how much disposable income the individual or married couple has. This is calculated by subtracting mandatory living expenses from their average monthly household income. So, for example, if a married couple is only a few months into their chapter 13 plan and wants to get divorced, losing bankruptcy progress wouldn’t be as disappointing as if the couple had already been in chapter 13 bankruptcy for a number of years.
There are other requirements chapter 13 bankruptcy debtors must complete to achieve a bankruptcy discharge. Chapter 13 debtors (along with chapter 7 debtors) are required to complete two online credit courses in order to receive a case discharge. The first needs to be taken before the case is filed. The second should be taken within 60 days of the 341 Meeting of Creditors, which is another requirement of chapter 13 bankruptcy debtors. This hearing gives the trustee an opportunity to verify the debtor’s identity and ask questions about their petition, and creditors the opportunity to appear and ask questions or make objections about the case. Chapter 13 bankruptcy debtors must attend an additional hearing, known as a plan confirmation hearing, which is exactly what it sounds like. Bankruptcy debtors also need to stay apprised of case updates and trustee requests, or risk case delays and interruptions in the automatic stay.
Whether a chapter 13 payment plan lasts 3 or 5 years depends on how the debtor’s household income compares to the state median household income. If all goes well, that is also how long protections from the automatic stay will last. The automatic stay prevents lawsuits, garnishments, repossessions, and other forms of creditor collection efforts. But creditors can ask the bankruptcy court to proceed with collection at odds with the automatic stay by filing a petition for relief. The automatic stay protections will also end if the debtor’s case is dismissed- the most common cause for dismissal in chapter 13 bankruptcy is nonpayment. If the payment plan is completed, the debtor should be entirely debt-free after discharge.
Why Divorce Interferes With Bankruptcy
When a married couple gets divorced, they must complete property division, and there may be a question of whether spousal support should be paid. Both assets and debts need to be split during property division. Married couples with children also need to determine child custody and child support. Bankruptcy freezes assets in a way that interferes with property division. If property division can’t proceed, neither can a divorce. Therefore, spouses in a chapter 13 bankruptcy case could have to wait until their case is complete to achieve a dissolution of marriage.
How To Handle Chapter 13 Bankruptcy When Divorce Can’t Wait
If you find yourself in a joint chapter 13 bankruptcy case with your spouse but you wish to end your marriage, there are a few different legal strategies to consider. They include:
- Modify the chapter 13 bankruptcy plan: After divorce, you and your spouse may split into two households, which could double your household expenses or more. However, they may be able to modify the chapter 13 bankruptcy payment plan and still afford to pay off mandatory debts.
- Continue the plan: If the spouses have almost completed a chapter 13 bankruptcy payment plan, their best bet may be to wait it out and finish payments before filing for divorce.
- Sever the case: Also known as bifurcation, some chapter 13 bankruptcy debtors will have the opportunity to split their cases into two separate cases. This means the bankruptcy cases will be based on the debtor’s needs as separate individuals rather than as a formerly married couple. In a bifurcation, the debtors should remain in the same chapter of bankruptcy after the cases have been severed.
- Convert the case: Household income may drop drastically after a household splits into two. This could help debtors who didn’t previously qualify show their eligibility for chapter 7 bankruptcy. Here, the spouses could convert the chapter 13 to chapter 7, only delaying a divorce filing for a few more months. However, this only allows them to clear unsecured debts, and secured and priority debts will remain after discharge.
- Dismissal: A chapter 13 bankruptcy case will be dismissed if the debtor fails to make payments, which they can do voluntarily rather than due to lack of funds. When the bankruptcy is dismissed, the debtors can proceed with divorce. After divorce, they can refile for bankruptcy separately if it is still necessary.
Don’t Let Marital Problems Throw You Off Track From Your Debt Relief Goals. Discuss Your Situation With Atlas Bankruptcy Lawyers Today
Chapter 13 bankruptcy has a much higher dismissal rate than chapter 7 bankruptcy, an effect that is only amplified by a debtor self-representing instead of hiring a firm. Take the guesswork out of bankruptcy so you can focus on whatever issues are most affecting you in life, especially if they are related to your bankruptcy filing. Atlas Bankruptcy Lawyers handles the heavy lifting so your bankruptcy filing can proceed smoothly. It’s more affordable than ever to declare bankruptcy by starting with your free phone consultation to see if you qualify for our flexible payment options. When you’re ready to get started, call 602-649-4949 to set up your free consultation with Atlas Bankruptcy Attorneys.
